Pennsylvania challenges $2 million corporate tax refund based on 2014 net loss carryover cap

by Brian J. Kutz

Pennsylvania is appealing a Commonwealth Court ruling giving a $2 million tax refund to a major communications company. The court awarded the refund after judges found that the company should not be subject to a capped Net Loss Carryover (NLC) and determined that retroactive application was necessary to cure any Due Process violation. 

The case involves corporate net income taxes (CNIT) paid by Alcatel-Lucent USA Inc. in 2014. Alcatel-Lucent petitioned for a refund of the CNIT paid based on a claim that the NLC cap is unconstitutional, and that retroactive relief is necessary. While the state Supreme Court previously ruled against imposing fixed dollar NLC caps on corporations, Pennsylvania is now challenging whether relief should be applied retroactively.

The issue

In 2014, Alcatel-Lucent carried over net losses of $791 million (accumulated since the tax year ending September 30, 2000) and generated $27 million in apportioned taxable income to Pennsylvania. In 2014, the state’s NLC cap was limited to the greater of 25% of income apportioned to Pennsylvania or $4,000,000. Alcatel-Lucent correctly applied the limitation based on 25% of apportioned income which resulted in $2,047,875 of CNIT liability. Despite applying the statute correctly, Alcatel-Lucent petitioned for a refund based on the NLC cap impacting larger corporations unfairly.

The court pointed out 13,219 small corporate taxpayers were able to reduce their CNIT liability to zero because their taxable income was less than $4 million, and their carried losses canceled their tax liability. Conversely, 347 larger companies could not reduce their tax liability to zero because of the CNIT NLC cap.

In previous rulings involving GM and Nextel, the state Supreme Court found the CNIT cap unfairly taxed large and small companies differently. The justices said the practice violated the state constitution’s Uniformity Clause, which states in part, "All taxes shall be uniform, upon the same class of subjects...”

Moving forward

The Alcatel-Lucent case now moves to the state Supreme Court. If the Alcatel-Lucent refund stands, corporations with pending claims could be able to obtain refunds.

Case citation: Alcatel-Lucent USA Inc., Petitioner v. Commonwealth of Pennsylvania, Respondent, No. 803 F.R. 2017.

The Boyer & Ritter tax department will continue to monitor this case and we will communicate updates to the appeal as appropriate. 

Brian J. Kutz is a tax manager with Boyer & Ritter LLC who provides services for businesses and individuals and works with clients in various industries. Contact Brian at 717-761-7210 or bkutz@cpabr.com